The case for higher wages

We are finally seeing some substantive argument about policy, with Scott Morrison supporting a cut in real wages, and Anthonly Albanese opposing it. I’ve drafted a response (over the fold)

Also here on my Blogstack

The ‘cost of living’ crisis has been central to the 2022 election campaign. The Consumer Price Index rose by 5.1 per cent over the year to March, and at an annual rate of 8.8 per cent over the last three months. Unsurprisingly, low-paid workers are seeking an increase in the minimum wage sufficient to offset this. Disappointingly, but also not surprisingly, employers and the Morrison government have opposed this claim, suggesting that this will make inflation even worse.

This response reflects the fact that talking in terms of the ‘cost of living’ is a dangerous and misleading way of discussing prices and wages. As Anthony Albanese has suggested, the crucial point isn’t the fact that prices have risen, but the fact that wages have not. In the end, no one cares about the fact that a grocery order that cost $50 in 1980 costs around $250 today. What matters is whether you can afford to pay for it.

For several decades after 1980, wage indexation and enterprise bargaining ensured that the real value of wages grew slowly but steadily. However, real wages have been stagnating for some years, and have fallen sharply since the resurgence of inflation. An increase of 5 per cent would merely reverse the recent cut.

Opponents of a wage increase have argued that it might lead to a wage-spiral spiral. But this way of thinking about inflation, dating back to the days when powerful unions could extract large increases in wages, and their employers could increase their prices to cover costs, is out of date.

Inflation is often described as ‘too much money chasing too few goods’. While this is an oversimplification in many cases, this is an accurate description of what is going on around the world right now.

The pandemic disrupted production and supply chains around the world. Its effects are continuing, most notably in China and have now been magnified by Russia’s invasion of Ukraine and the sanctions imposed in response.

Meanwhile, the massive increases in public expenditure to fight the pandemic were financed by ‘quantitative easing’, that is, money creation, on a massive scale. The conventional approach to expansionary monetary policy, cutting interest rates, had reached its limits when the Reserve Bank cash rate was cut to 0.1 per cent.

Now that quantitative easing is no longer needed, the problem is how to manage the huge increase in money balances that is driving demand. This is not a new problem; it arises every time a lot of spending is needed to handle an emergency, and we know what works and what does not. In the aftermath of World War I, governments in the UK and Australia sought to unwind the inflation created by wartime spending and return to the gold standard. The result was a long period of economic weakness, culminating in the Great Depression. By contrast, after World War II, wages and prices were allowed to rise, as wartime rationing ended and reconstruction gradually removed constraints on production.

As long as the real value of wages is maintained, a once-off increase in the price level is a small price to pay for avoiding economic disaster during the pandemic. The reconstruction of supply chains, along with the underlying increases in productivity generated by technological progress, will allow a gradual return to lower rates of inflation. We can also hope for some additional gains arising from the experience of the pandemic with remote work, telecommunications and home delivery of goods and services.

Once the current upsurge in prices is past, we need to reconsider whether the inflation targeting regime introduced around the world in the 1990s, based on frequent small adjustments to the central bank interest rates, is still appropriate. Inflation targeting, failed to prevent the Global Financial Crisis, and was abandoned during the pandemic. Even though interest rates are rising in the short run, there’s still very little capacity to cut them in the event of a new emergency. It might well be better to target growth in the money value of GDP, and to accept inflation somewhat higher than the 2-3 per cent range that has been aimed for, though not always reached, under inflation targeting.

But this is a question for another day. The inflation we have observed in the last year was not caused by low-wage workers, most of whom did not see much benefit from the big expenditure during the pandemic. They should not be asked to bear the costs of a misconceived program of deflation.

63 thoughts on “The case for higher wages

  1. Geometric mean, productivity & zombies.

    “Throughout this, the advocates of the productivity agenda rejected the idea that productivity growth was simply code for working harder. But finally, they have begun to admit this. In evidence before the Senate standing committee on economics in 2012, the Commission conceded that work intensity (also described as “cutting the fat of organisations”) is an unmeasured source of productivity growth, and stated that the debate “was settled in the mid-2000s”.

    “The problem is, as the experience of the last 20 years has shown, that productivity gains achieved by driving workers harder are not sustainable, except in recession conditions like those of the 1990s. As soon as the labor market recovers, overworked employees will either quit to look for new jobs, or find unofficial and unsanctioned ways of restoring work-life balance.

    “Genuine long-term improvements in the productivity of the economy can be gained only through educating the workforce to take account of improvements in technology (only a small proportion of which are generated domestically) and through macroeconomic and labour market policies that avoid wasting human potential through unemployment and other forms of social exclusion. It’s time to focus on these issues and bury the zombie agenda of the 1980s once and for all.”

    “Like a zombie, the productivity doctrine is back – we need to fight it”

  2. “Genuine long-term improvements in the productivity of the economy can be gained only through educating the workforce to take account of improvements in technology ….”

    Would this include educating the Treasurer to the effect that giving jobkeeper funds to corporations who did not need it but not to Universities is not consistent with the advice in the above quote? And what about those in charge of robodebt – education first and then technology? And the flow-on cost of the robodebt class action?

    I’d like to add a point to those raised in KT2’s post. The notion of ‘labour productivity’ fails to distinguish between the productivity of managers and those who are managed.

  3. To be fair to Harry Clarke, and of course I do take issue with him on other points, he did write against the failure of this government and treasurer to recoup the incorrectly paid job-keeper funds from those corporations which got that windfall. I don’t recall discussing the Universities not getting the funds. But they should have for sure. Education in technology is of key importance.

    Also of key importance is education in the general humanities including language and philosophy. I’ve noticed that some much more educationally accomplished people than me, albeit only in their narrow technical field, are kind of ingenues outside that narrow specialty. I expressly do not refer to most people here when I say that. KT2 takes a polymath approach. John Quiggin and Ernestine Gross clearly have a philosophical turn [1] to their thinking and are not economists I could or would accuse of narrow economism. [2]

    If we doubt the productivity of managers (and I do, certainly above the line manager level) how much more must we doubt the productivity of owners? I’ll leave it at that.

    An Aside on Chemistry (Yes, this is relevant to economics!)

    A long time ago I studied Grade 12 chemistry and then passed one semester each of Chemistry and Biochemistry at university before changing courses. In this last year, the mere act of trying to balance pool chemistry has taught me how little I had really learned about Chemistry in what was clearly Chemistry 101. It’s an example of how a little knowledge is a dangerous thing. I thought I knew what pH was and how it all worked, inside out. How little did I know!

    It’s a simple scale right? It’s about acids, alkalines and neutral at the middle of the scale, no? Acids are acids and alaklines are alkalines, correct ? It’s not so simple as I have since found out. There are actually three kinds of alkalines and they all behave differently. They seem to be grouped as hydroxides, carbonates and bicarbonates (going from memory of recently acquired, still imperfectly absorbed knowledge here). At least two of the alkaline classes (carbonates and bicarbonates) behave differently according to the pH of the solution they go into. Sodium bicarbonate (ordinary old “bicarb soda”) is bivalent and can act as a weak alkaline or as a weak acid depending on the pH of the solution it goes into (and is effective at this for practical purposes within a quite narrow range of pH, say from 7 to 8; neutral to weak alkaline. It’s why the pool business calls it a “buffer”.

    This concept (and reality) of a substance or input into a system changing its qualities or effects depending on the state of the system it goes into, must be regarded as key, I think, to understanding that one must move beyond Econ 101 or Chem 101 etc. or one will be stuck in a simplistic theory inapplicable to complex systems reality.

    Note 1 – What do I mean by a “philosophical turn”? I mean an awareness that the world is far more complex than our theories about it. I also mean an awareness that one must question assumptions especially the base assumptions (a prioris) of one’s own position. I fall short of these standards myself of course but I keep working on it.

    Note 2 – “The term (economism) is often used to criticize economics as an ideology in which supply and demand are the only important factors in decisions and outstrip or permit ignoring all other factors. It is believed to be a side effect of neoclassical economics and blind faith in an “invisible hand” or laissez-faire means of making decisions, extended far beyond controlled and regulated markets and used to make political and military decisions. Conventional ethics would play no role in decisions under pure economism, except insofar as supply would be withheld, demand curtailed, by moral choices of individuals. Thus, critics of economism insist on political and other cultural dimensions in society.” – Wikipedia.

  4. Ikonoclast, You quote:

    ““The term (economism) is often used to criticize economics as an ideology in which supply and demand are the only important factors in decisions and outstrip or permit ignoring all other factors. It is believed to be a side effect of neoclassical economics and blind faith in an “invisible hand” or laissez-faire means of making decisions, extended far beyond controlled and regulated markets and used to make political and military decisions. Conventional ethics would play no role in decisions under pure economism, except insofar as supply would be withheld, demand curtailed, by moral choices of individuals. Thus, critics of economism insist on political and other cultural dimensions in society.” – Wikipedia.”

    I wonder who this quote refers to. My guess is the empty set. It certainly does not refer to Adam Smith who claimed his best work was “Moral Sentiments”, a book-length treatment of virtue ethics which consider the non-economic drivers of human behaviour. The book itself virtually covers all of the basic ideas in modern behavioural economics. If the quote is a snide shot at me then it missed its targets. i taught “Economics and Ethics” as a subject in the university, alternative ways of assessing ethical positions in economics including utilitarian cost-benefit approaches and deontological approaches that emphasised principles and Kantian categorical imperatives. For example I showed that the paradoxes of the Prisoner’s Dilemma disappeared when the values of the players followed the Kantian categorical imperative. If the quote is directed at modern welfare economics then, again, it misses its targets. Kenneth Arrow, one of the founders of modern welfare economics, endorsed socialism. His “Second fundamental theorem’ (the one Ernestine seems unable to get his head around) provided a logical foundation for market socialism by splitting the issue of a fair distribution of income (which could be determined by values and politicians) from the use of markets which would realise this desire economic distribution without waste.

    Maybe you are concerned with right-wing figures like Milton Friedman. I always respected Friedman because he took the basic ideas of supply/demand and of free choice o their logical conclusions. He was a voice to answer and some of his arguments – the “negative income tax argument” for example, seem isomorphic with John Quiggin’s proposal for a guaranteed minimum income.

    It’s logically OK to make claims about the empty set because they are always, by definition, true. The difficulty, I guess, is that some might not recognise that the set is empty so that you claims do in fact reflect real views about the world out there.

  5. Harry,

    The set is not empty. Neoliberals are always and everywhere against pay rises, one might say. They talk about productivity gains being necessary. Even when these have occurred, no minimum wage real pay rises ever seems to be actually countenanced. Then later on, it’s “not the time.” It’s never the time for basic wage pay-rises under neoliberal governance.

    You seem unconcerned about issues I have raised before. The issue of profit push inflation, you ignore. The issue of churning and admin. overhead (taxing to top up poor wages) you ignore.The issue of moral hazard (people running cheap businesses which pay minimal or even illegal low wages getting welfare-subsidized labor) you seem to ignore too.

    You are not entirely a neoliberal it seems to me. On other issues we agree. But on the minimum wage issue we are never going to agree.

  6. Harry, you write:
    “Kenneth Arrow, one of the founders of modern welfare economics, endorsed socialism. His “Second fundamental theorem’ (the one Ernestine seems unable to get his head around) provided a logical foundation for market socialism by splitting the issue of a fair distribution of income (which could be determined by values and politicians).”

    You are wrong. While I assumed in my first objection to your assertion you simply made a little error, I now believe I have been too generous. Moreover, you do not provide a reference for your narrative.

    But first the easy bit. Contrary to your statement, “Ernestine” is not a he but a she.

    Second, it is you who does not understand the second fundamental welfare theorem and you didn’t even bother to check with Wikipedia. That is, you didn’t check with the proof of the theorem. The proof of the theorem is introduced exactly how I had put it, namely one starts of with a Pareto efficient allocation and then asks can this allocation be decentralised by means of a price system and an adjustment to ‘initial endowments’ assuming they are known.
    To quote: The second theorem formally states that, under the assumptions that every production set {\displaystyle Y_{j}}Y_j is convex and every preference relation {\displaystyle \geq _{i}}\geq _i is convex and locally nonsatiated, any desired Pareto-efficient allocation can be supported as a price quasi-equilibrium with transfers.[36] Further assumptions are needed to prove this statement for price equilibria with transfers. End quote

    The method of proof in the article corresponds to the method of proof in Debreu (1959) which I had referenced. (Why am I so sure, you may ask. Simple, I was awarded a PhD in the 1980s for an extension of the Arrow-Debreu model to the case of a partially segmented economy with multinational producers. Yes, I did present this in the presence of Prof Debreu on the occasion of his visit to the University of Sydney.)

    You used the phrase ‘the second fundamental theorem suggests’. I followed your usage when objecting to your first lot of assertions. I assumed you pick the point that a suggestion is not the same as a theorem. Apparently you did not notice the distinction. A “suggestion” is hand waving until the truth content of it has been established. You have not done so.

    And while I am at it, you adjudged my statement about results from the theory of incomplete markets as hand waving and you advised I should read Stiglitz. As it happens, the above wiki link also contains a section on the Greenwald-Stiglitz theorem:
    “In their 1986 paper, “Externalities in Economies with Imperfect Information and Incomplete Markets”, Bruce Greenwald and Joseph Stiglitz showed that the fundamental welfare theorems do not hold if there are incomplete markets or imperfect information.” If you read further you’ll find a statement on ‘generic inefficiency’

    Side products, which degrade the natural environment are negative externalities. Hence the theoretical results on incomplete markets are relevant.

    I referenced Quinzii and Magill because they have produced original work in this area and I took their 6 weeks lecture series during a sabbatical in the University of Bonn.

    I tried a polite way to help you out. But it didn’t work. So, this is my firmer response.

  7. Scott Morrison has conceded the election and congratulated Anthony Albanese to become the next Prime Minister of Australia.

    Relating this outcome to the “Second Fundamental Welfare theorem” isn’t all that difficult. The voting public decided the society is NOT in a Pareto efficient state and therefore this theorem is irrelevant even for the complete market case (cannot be applied). Given the green vote (Party and independents), a growing number of people understand that ‘the market is incomplete’ and requires policy action (people are realistic in the sense of not expecting to reach a state of Pareto efficiency with a probability non-trivially above 0).

    Increasing the minimum wage to aim at maintaining the standard of living of the least wealthy isn’t something that scared voters. Without wishing to overinterpret the election outcome, I’d say the post 1950s theoretical results on conditions (minimum wealth condition) under which ‘an equilibrium’ is conceivable are closer to the voters’ notion of how an economy works then some appeal to ‘market clearing’ (and the method of counting the number of equations and the number of unknowns).

    None of the above entails the claim of knowing why the electorate voted the way they did. It is merely an exercise in relating observables to some econ theories.

  8. Student Harry Clarke

    Please discuss your cognitive dissonance:

    Title: “Why economics 101 goads us to be greedy, and forget the needy” …

    Considering “Pareto originally used the word “optimal” for the concept, but as it describes a situation where a limited number of people will be made better off under finite resources, and it does not take equality or social well-being into account, it is in effect a definition of and better captured by “efficiency”.[2]” Wikipedia

    Marking Rubric
    1) Your dissonance is to be discussed. 40%
    2) Lesson Two examples 20%
    3) Revelations of dissonance & biases 40%

    Reading 1;
    “Why modern politics goads us to be greedy, and forget the needy

    Reading 2:
    “Cognitive bias cheat sheet
    Because thinking is hard.
    Buster Benson

    Reading 3:
    Economics in Two Lessons by Quiggin

    Reading 4:
    Zombie Economics by Quiggin

    Growth-fessor Self Epistemology Empty Cup suggests as a mindset before attempting:
    “Soon, it became obvious that the scholar was full of his own opinions and knowledge. He interrupted the master repeatedly with his own stories and failed to listen to what the master had to say.

    “The master calmly suggested that they should have tea.
    So the master poured his guest a cup. The cup was filled, yet he kept pouring until the cup overflowed onto the table, onto the floor, and finally onto the scholar’s robes.

    “The scholar cried “Stop! The cup is full already. Can’t you see?”

    “Exactly,” the Zen master replied with a smile. “You are like this cup — so full of ideas that nothing more will fit in. Come back to me with an empty cup.”
    View at

  9. The economism case for better weighting, ranking and small effects ignored:

    This mentions JQ 2010;
    Contribution to GTI Roundtable “On Economism”
    An exchange on the essay The Church of Economism and Its Discontents
    John Barry
    December 2015

    “Norgaard rightly points out how fragile the assumptions behind market economics are. Here are some more suggestions to add to the ones he outlines.

    “Twelve Theses on Neoclassical Economics”

    “The ideological power of capitalist economics cannot and should not be underestimated. Its comprehensive failure to predict the current global economic crisis has led neither to its displacing as a useful paradigm nor to the reforming and reformulating of the paradigm. Rather, we have witnessed what John Quiggin provocatively but correctly labels “Zombie economics.”6 That is, dead, analytically useless (but politically and ideologically powerful) ideas and nostrums still reign over us in terms of informing everything from “common sense” and everyday understandings of the economy, to state economic policy, to the political platforms of political parties. This entails recognizing the “common sense” and “taken for granted” nature of capitalist economics and its emphasis on growth, i.e., that almost everyone seems to at least tacitly, if not explicitly, accept it.

    Norgaard “…is considered one of the founders of and a continuing leader in the field of ecological economics.”

    “Probability weighting and Ergodicity Economics
    Ole Peters in Uncategorized March 6, 2020 1,806 Words

    “One key observation that helped launch the field of behavioral economics into stardom is called probability weighting: a human cognitive bias to assign higher probabilities to extreme events than … well, than what? Than what someone else thinks the probabilities should be. Below, I will present a very simple mechanistic explanation, most of all for the iconic probability weighting figure in (Tversky and Kahneman, 1992). The result is a now familiar theme: (behavioral) economics expresses a more or less robust observation in psychological terms, as a persistent cognitive error. Ergodicity economics explains the same observation mechanistically, and as perfectly rational behavior.”

    From JQ:
    “The underlying reasoning is that, in a dynamic process repeated over time, taking low-probability extreme risks will (very probably) catch up with you. I’m pretty sure I made an argument of this kind in support of RDU back in the 1980s, but I haven’t been able to locate it for now”

  10. Interesting post by David Walker at Clubtroppo, with supporting/ opposing views and comments, re wages & Econ 101, and Card Nobel, problems with “the paper data and natural experiment”.

    Plus Andrew Leigh research shiwing wage rise /cut to employment. As ever, the devil will be in the incentives and supports detail, with only time it seems to provide an answer.

    “A Nobel Prize leaves the minimum wage question open

    “We also have some Australian research, though not a lot. The best comes from widely admired economist Andrew Leigh, and it was done before he left the ANU for the national parliament. He is now a Labor federal MP, and doesn’t seem to be talking as much as he used to about the problems with the minimum wage. But some of Leigh’s work, based on Western Australian data, has suggested that a 1.0% increase in the minimum wage could be expected to cut employment by between 0.15% and 0.39%. A 3% minimum wage rise, then, would cut 60,000 jobs or more. This is not a jobs catastrophe, but it’s not trivial, especially if your job is one of those that disappears.”

    “My argument here is that you should try to distrust your certainty a little. As Richard Feynman argued: even at their best, the social sciences are nothing like physics.”

  11. “Card & Krueger cleverly gave us evidence that raising the minimum wage might not always have the result many economists expected.” [Source: clubtroppo….. referenced by KT2]

    And this is what one would expect from a general equilibrium perspective that starts from the position of ‘the economy’ is not in equilibrium (as assumed in Econ 101 – well roughly speaking)

    First, the percentage change in the minimum wage (set by regulation), relative to all other incomes surely matters. To make the point all too obvious, suppose the minimum wage is changed to Elon Musk’s hourly wage, however roughly approximated. Then, I would bet my last Dollar ‘economic activity’ would cease very quickly or some sort of revolution would happen.

    Second, what would be sensible minimum wage rate increases? What point of reference could be used? It depends. It depends on the initial conditions (contrary to comparative statics, one has to start from where we are and not compare alternative theoretical economies). If the existing minimum wage rate allows people to provide their labour services at this wage rate to cover all living expenses that afford what is considered to be a ‘decent way of living’ (very little but some discretionary expenditure) in a particular society, including transport costs due to privatised toll roads that have to be incurred to get from home to work, then an increase of the minimum wage rate to compensate for ‘inflation’ – the change in the prices of goods and services that are bought to afford a ‘decent way of living’ – seems to me to be a sensible increase. However, if the existing minimum wage rate is such that people cannot afford a ‘decent way of living’ then an increase above the appropriate inflation ration rate seems to me to be a sensible increase. Finally, if existing minimum wage rates keep workers only at the survival constraint (alive but in a brutish way), then a substantial increase in this minimum wage rate may well upset the apple cart for some ’employers’ but benefit others and result in an increase in ‘economic activity’ overall. All this would depend on the quantitative relationships.

    I often write about the minimum wealth constraint, which is clearly characterised in post 1950 general equilibrium models (of competitive private ownership economies) but not in Econ 101. In an applied context, this constraint needs to be interpreted within the context of an actual society at a particular time. The above paragraphs are aimed to give some examples.

    IMHO, Economics is not a field of inquiry that can be treated like natural sciences. That is, the testing of theories as done in natural science is not possible. Thing change too quickly. Empirical studies are nevertheless one input for decision making. But, IMHO, another ‘input’ should be what kind of society do the members of this society wish to live in? A society where stepping over destitute people on the footpath on the way to an expensive restaurant? Or a society where income and wealth differences are accepted but within some generous limits. The minimum wage seems to me to be a crucial variable. Let the rest of the prices adjust to what a ‘decent society’ wants.

  12. Ernestine said “Or a society where income and wealth differences are accepted but within some generous limits” – yet it seems the FWC has built in dogma against such generosity of spirit.

    From “Lifting the minimum wage is anything but reckless – it’s what low earners need” by Peter Martin…

    Is anyone able to point to research to back this assertion? – ” It was also reluctant to grant a flat dollar increase that would boost the position of low earners relative to higher earners, saying past flat dollar increases “compressed award relativities and reduced the gains from skill acquisition”.

    What! “reduced the gains from skill acquisition ” goes completely against your questions Ernestine,in culture war grounds empiricism be damned. The devil is always in the formula and what is not in the specification.

    The poor get to subsidise non discretionary spending, and clean the rich houses and wipe their aged parents arses too.

    More women than men. Who didn’t get calculated into wages for all their free child raising and chores. Not high in the niceness scale. A “women” stiIke?

    Oh, no nice in wage parity or Econ 101.

    Who was it who said year 1 Econ student share more in ultimatum game than older “more learned in economics” students?

    “The commission says low income households spend more of their income on essentials than higher earning households, making “non-discretionary” inflation especially relevant. Non-discretionary inflation is running at 6.6%.”

    Q: which contributes more to inflation- discretionary or non discretionary spending?

  13. Ernestine, our current “Young Australian of the Year” Dr Daniel Noor, started Street Side Medics, precisely because he was on the way to a restaurant and was “stepping over destitute people on the footpath on the way to an expensive restaurant?”

    And Robert H Frank imo would endorse you questions re walking over the destitute.

    On Robert Frank’s Wikipedia page under the “Prisoner’s dilemma and cooperation” tab;

    “First year economics students, and students doing disciplines other than economics, overwhelmingly chose to cooperate. But 4th year students in economics tended to not cooperate. Frank et al. concluded, that with…
    “an eye toward both the social good and the well-being of their own students, economists may wish to stress a broader view of human motivation in their teaching.”

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